Australia: Offers of compromise – 'exclusive of costs'

Last Updated: 18 March 2012
Article by Judith Waldock and Elizabeth Herbert

McGlen-McLeod v Galloway (No. 2) [2012] NSWDC 11

In May 2008, the plaintiff was injured when she fell through rotten floorboards on the veranda of rental premises in Valery (south west of Coffs Harbour). She brought proceedings for damages against the owner in the NSW District Court. The trial proceeded before Judge Gibson in October 2011. The plaintiff relied on medico-legal evidence, and her own testimony, to claim she suffered significantly disabling disabilities, despite there being a lack of support in contemporaneous medical material that she suffered anything other than fairly mild injuries. The defendant tendered surveillance film, showing the plaintiff performing vigorous and strenuous physical activities without apparent restriction or discomfort, contrary to her evidence and her reports to doctors. The defendant did not serve an assessment from an orthopaedic surgeon who examined the plaintiff for the proceedings.

The plaintiff sought damages of over $270,000. Gibson DCJ awarded only $700, based on two week's lost wages, and $100 in past treatment expenses (McGlenMcLeod v Galloway [2011] NSWDC 163). Her Honour noted that the surveillance footage demonstrated that the plaintiff was able to go about her daily activities without obvious restrictions, and that her complaints of ongoing disabilities were 'grossly exaggerated'.

She ordered the defendant pay the plaintiff's costs, but gave the parties liberty to apply, should they contend, different costs orders should be made.

Costs applications

The defendant made an application for costs which was heard early this year, and Judge Gibson delivered her decision on 20 February 2012.

There were two aspects to the application.

The first was that, due to service of offers of compromise, the plaintiff should pay the defendant's costs on an indemnity basis, from the date of service of the offers.

The alternative application made, in the event the first was unsuccessful, due to the very modest size of the award of damages, the plaintiff should not receive any of her costs at all.

Both applications failed.

Offers of compromise

On 20 July 2010, the defendant made an offer of compromise in the following terms:

'By making payment of the sum of $4,000 plus costs in answer to the cause of action on which the plaintiff claims.'

A second offer was made in January 2011, in similar terms, but instead offering the amount of $20,000 plus costs.

The defendant argued the offers entitled it to indemnity costs pursuant to UCPR 42.15, which provides that if an offer made by the defendant is not accepted by the plaintiff, and the plaintiff obtains a result as or less favourable than the offer, then unless the court orders otherwise, the defendant has to pay the plaintiff's party / party costs up until the day the offer was made, but is entitled to an order that the plaintiff pay the defendant's costs on an indemnity basis from the day after the offer was made.

The plaintiff argued that both offers offended UCPR 20.26, and that the cost consequences under the rules should not apply.

UCPR 20.26 relevantly provides:

  1. In any proceedings, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, either in whole or in part, on specified terms.
  2. An offer must be exclusive of costs, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs. [emphasis added]

  3. ...
  1. A notice of offer that purports to exclude, modify or restrict the operation of Rule 42.14 or 42.15 is of no effect for the purposes of this Division.'

Rules 42.14 and 42.15 provide the cost consequences in the event an offer is not accepted, and the maker obtained a result as favourable as the offer, or better.

The plaintiff relied on Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141 to contend that any reference to costs, including references of the kind made in the offers under consideration here (i.e. offers 'plus costs' or 'exclusive of costs'), with the one exception referred to in the Rule, fatally taints the offer of compromise.

Her Honour agreed.

Her Honour's judgment deals with a number of cases after Dean where courts have taken different approaches to the validity of offers of compromise, which provide for settlement on a basis of '$X plus costs' or '$X plus costs as agreed or assessed'. Some courts have upheld the offers as valid offers of compromise attracting the costs protections under the rules, and some have not.

Most recently, the Court of Appeal considered offers made in a complicated piece of commercial litigation [Old v McInnes [2011] NSWCA 410 (22 December 2011)]. One of those offers was expressed as payment of a sum of money, and payment of costs as agreed or assessed. The Court of Appeal unanimously held that the offer offended the provisions of UCPR 20.26, and so it was invalid, and the costs protections under the rules did not apply. The majority judges held that it could not be relied upon as a Calderbank offer either, because the party making the offer hadn't made clear an intention to do so at the time the offer was made.

While it is hard to understand why the Court of Appeal considers an offer made 'plus costs' is not an offer made 'exclusive of costs', it may boil down to potential ambiguity about what 'plus costs' actually means.

Does the expression mean costs up to the date of acceptance of the offer, or costs up until the date the offer was made?

The UCPR provides that unless a court otherwise orders, costs follow the event (UCPR 42.1). A party who settles a claim by accepting an offer of compromise for payment of a sum of money is therefore, under the rules, entitled to their costs, as they have had success in the proceedings by recovering some money.

UCPR 42.13(A) provides:

  1. This rule applies if the offer concerned:
    1. is made by the plaintiff and accepted by the defendant, or
    2. is made by the defendant and accepted by the plaintiff.
  1. The plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made, unless:
    1. the offer states that it is a verdict for the defendant and the parties are to bear their own costs, or
    2. the court orders otherwise.

Therefore, a party who accepts an offer of compromise is, by the rules, entitled to party / party costs up to the time the offer is made. The offer does not need to deal with costs for that rule to apply, and therefore can be made 'exclusive of costs' by not making any reference to costs at all.

When finding that the offer of compromise made offended UCPR 20.26, Gibson DCJ observed that consideration could be given, in consultation with members of the profession, to whether the costs rules, as currently drafted, conform with the general practice and custom of the lawyers who endeavour to make use of them.

Costs following small verdicts

We now turn to the second arm of the defendant's costs application (that the plaintiff ought not recover any costs due to the modest verdict recovered).

UCPR Part 42 Rule 42.35 provides that a litigant in District Court proceedings ought not to get their costs where otherwise entitled (i.e. successful in proceedings) where the judgment obtained is less than $40,000 (the jurisdictional limit of the Local Court) unless the District Court is satisfied that it was appropriate to commence and continue proceedings in that court rather than the Local Court.

The defendant argued that the plaintiff ought not to get her costs because she obtained a result significantly less than the costs threshold. However, Gibson DCJ held that there was medical evidence relied on by the plaintiff which, if accepted, indicated significant disabilities giving rise to a claim above the jurisdictional limit. She also noted the defendant had not served a medical report from its medico-legal assessment.

It is perhaps surprising that, noting the findings made about gross exaggeration of the degree of disability (including when complaining to doctors providing reports in support of the plaintiff's case) the significance of the surveillance film didn't feature in her Honour's consideration of whether it was reasonable for the plaintiff to commence or continue proceedings in the District Court rather than the Local Court.


An offer of compromise made to settle a claim on a 'plus costs' or 'plus costs as agreed or assessed' basis runs the risk of falling foul of the court rules, and may not give the party making the offer any costs protection at all.

This result seems at odds with current practice, and indeed the purpose of the rules regarding offers (the Court of Appeal's interpretation, with respect, significantly reduces the effectiveness of the rule which is designed to facilitate settlements).

Care must be taken when formulating offers, and it may be prudent when making an offer of compromise to inform the other party that, should the offer of compromise contain some formal defect, the maker intends to rely on it as a Calderbank offer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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